Earnings Call Transcript - CXAI Q2 2024

Operator, Operator

Good afternoon, and welcome to the CXAI Second Quarter 2024 Earnings Conference Call. Please be advised that this call is being recorded. And now I would like to turn the conference over to Mr. Khurram Sheikh, Chairman and CEO of CXApp Inc. Please go ahead, sir.

Khurram Sheikh, Chairman and CEO

Thank you, operator, and thank you, everyone, for joining the quarterly earnings call for CXAI, pronounced Sky. I plan to discuss CXAI's financial results for the second quarter of 2024. I will also provide an overall business update on our progress in shaping the future of work and creating transformative employee experiences. By now, everyone should have access to our earnings press release announcement. We have also filed our quarterly earnings report, our 10-Q for Q2 2024 with the SEC today. This information will also be found on our website, www.cxapp.com. With that, I'm going to move to show some disclaimer slides, which people can review at their own leisure. So now let me tell you a little bit about the company, CXAI. We are listed on NASDAQ. As you know, we're an AI and enterprise software company, creating a new segment and software called Employee Experiences. We're headquartered in the San Francisco Bay Area, where we have design and development resources all over the globe with main hubs in Toronto and Manila. More importantly, we have customers that are globally situated, although all our customers are headquartered in North America. We're deployed in around 200-plus cities in 50 countries across all five continents, which illustrates the depth and breadth of our capabilities and our span across the globe. Our customers are Fortune 1000 companies that possess great enterprise capabilities globally. The reason why CXAI or Sky is trusted is that we have a great technology platform built on 37 filed and 17 granted patents. Our team of 80 innovators globally, mostly engineers, more than two-thirds of the team, are great collaborators, innovators, and design thinkers creating the next generation of the future work. So, we are super excited to share with you the progress we've made and the outcomes we have achieved. I'm going to start by talking a little bit about the market and what's shaping it. It’s very obvious that the world is heading towards an AI-centric model, where transformation is happening across all sectors of the industry, and we are the company that is driving this transformation in the workplace as we speak. So, let me talk about the market, what's happening in the market right now. It's obvious that work-from-home was the predominant use case during the pandemic. Work-from-home is now stabilizing at around 25% of days, translating to one to two days a week, still a significant jump from 2019 when we had less than 5% of people working from home. The work-from-home trend is here to stay; it’s becoming more stable and predictable. Looking ahead, there's also a trend concerning office occupancy. During COVID and post-COVID, there was a rise in occupancy in the marketplace that has flattened out for the last number of years. For the last two years, the levels have settled around 50% of 2019 levels. This data shows that now we are in a position of stability, or at least, a new work norm is being established. This data that I'm sharing is courtesy of Professor Nick Bloom at Stanford, who is a leading thought leader in this field. A lot has changed, but now there's a new norm called Hybrid Work. What is Hybrid Work, and why is it important? As you can see, 37% of U.S. companies have adopted a structured hybrid model, up from 20% in Q1 of 2023. It is clear that the world is moving towards this structured hybrid model. Some companies are still requesting full-time office attendance, while others are fully flexible, but the structured hybrid model seems to be the most successful and useful model. Managers have reported an increase in productivity, improved work-life balance, and reduced burnout. Employees desire the opportunity to have flexibility; that flexibility is key to the success of the new work experience. As we advance in this structured hybrid environment, large Fortune 100 and 1000 customers are adopting this model more and more. More than 67% of companies with over 25,000 employees are utilizing structured hybrid models. Likewise, most of our customers fall within that footprint, either 25,000 or 5,000 to 25,000 employees. Concurrently, this phenomenon is expected to grow across all segments. We believe that this trend will define the future of work, and there is no turning back now. This is how industries are adapting to the expectation of workers in terms of office returns and remote work. We're transitioning to working from anywhere, equipping employees with the capabilities, tools, and technologies to succeed in any environment. Now, when discussing the challenges of hybrid work, we are seeing what is known as the hybrid coordination tax. The hybrid coordination tax refers to the fact that as employees navigate their new work arrangements, there are many elements to consider. The effort needed to optimize the return to office while maintaining productivity, along with the logistics of coordinating meetings when some team members are present while others are virtual, create a challenge. It demands coordination and consultation, all of which can be streamlined through technology. No longer is simple phone calls or emails sufficient; it must be about effectively coordinating across all digital platforms. That's the essence of communication and the power of intelligent platforms. CXAI facilitates this by enhancing these communications. Furthermore, the time designated for coordination and setting up meetings is becoming a burden on employees, consuming 30% of their time, costing companies tens of thousands of dollars per employee. This is a significant cost challenge. More importantly, return-to-office mandates have not been effective for many employees and employers. A new term has emerged known as 'Hush Hybrid,' characterized by practices like coffee badging and implementing shadow policies. Coffee badging refers to employees entering the office, clocking in, grabbing coffee, and leaving shortly thereafter, as they are only monitored when they check-in. Lack of awareness and managerial understanding is evident, with data showing that 15% of hybrid workers engage in coffee badging. Shadow policies involve employees negotiating schedules and arrangements for flexible work with their managers. Transparency and visibility to comprehend what is happening on the ground are crucial. Noting this hush hybrid occurrence is pivotal as we identify the need for solutions to the ongoing challenges. Thinking about these challenges faced by companies transitioning to hybrid work is where we dedicate our efforts. Now, moving on, what are we doing and why is an AI-centric solution essential? At CXAI, we’ve built this platform with a clear purpose. The goal is to create transformational employee experiences from start to finish. When discussing transformation, it encompasses the employee's entire day—from the time they begin their workday to when they end it. CXAI is a unique enterprise employee experience platform that enables seamless connections across people, places, and things, providing a best-in-class workplace that employees will love. It offers a true enterprise solution designed for millions of users, with enterprise-grade security and supports over 100 integrations with corporate systems. These integrations enhance experiential data and empower CXAI's advanced analytics, which foster innovative ways to boost employee productivity and engagement. As you see, we have embraced an AI-centric approach focusing on workplace integration, intertwining a seamless customer experience with artificial intelligence—aiming for employee-centric solutions that transform workspace operations into more intuitive and efficient environments that yield happier, more productive employees. The solution initiates with a branded immersive mobile or web app, allowing large clients to utilize their logos, content, and identity to ensure users feel at home in their work environment. Moreover, the analytics and data operate within a trustworthy atmosphere, collecting user data in an enterprise setting while offering reliable insights to both users and employers. We have constructed an end-to-end architecture that is genuinely multi-cloud, supporting all cloud systems. Our collaboration with Google Cloud is expanding, and we are simultaneously engaging with other cloud providers. Additionally, we are exploring integration across multiple operating systems and devices since interactions occur on various platforms—not just mobile phones but also laptops, kiosks, and wearable devices. The vision of CXAI fundamentally revolves around assuring that data is accessible across all devices globally, accommodating diverse environments for all our customers. Delving deeper into the capabilities beneath the CXAI platform, the primary technology strengths we have cultivated include AI-native, mobile-first, and cloud-first technological foundations. Our focus is directed towards enhancing employees' abilities and experiences. The first pivotal aspect is the unified employee experience—a central platform integrating various workplace functionalities into a unified workflow, reflecting CXAI's commitment to a cohesive mobile workforce approach in workspace technology. The platform aims to provide a consistent, personalized workflow across mobile and web, enabled by over 100 integrations with enterprise backend systems. This mitigates complexities for users, producing a clean, context-specific user interface to facilitate their tasks effortlessly. The second key area is Spatial Intelligence, which focuses on optimizing space and interaction through location-based technologies, providing contextual awareness. The third foundational component of our strategy involves experiential analytics, utilizing AI to derive insights into employee engagement and workspace utilization—underscoring the importance of data in guiding decisions and measuring productivity. Finally, generative AI enhances efficiency and productivity through voice and text commands for tasks like scheduling meetings or discovery. This streamlines administrative responsibilities, driving efficiency and convenience while personalizing knowledge augmentation. By leveraging advanced multimodal large language models, we are integrating responsible, secure, and reliable gen AI capabilities through a retrievable augmented generation model that uses internal enterprise data to promote intelligent planning and interaction across various formats. This comprehensive solution positions CXAI at the forefront of advanced capabilities in the current marketplace, and we are proud to offer this to our clients today while rolling out the generative AI element across our customer base and for new clients also. Now, why do enterprise leaders choose CXAI? It boils down to several factors. Firstly, we offer an engaging all-in-one app that features an intuitive user experience, seamless integrations, and immersive content. There is no solution available in the enterprise sector that combines these elements into a singular app. Secondly, we simplify complexity into productivity. We automate workflows, providing straightforward actions through just one click or voice command, ensuring enterprise-grade security while acting as a trusted adviser. Finally, we deliver insights to both employees and employers that enhance their experiences. Our AI-powered analytics yield predictable outcomes and provide insights that promote greater productivity within the workplace, while allowing employers to optimize their environments into more intelligent and engaging spaces. With this context regarding the market and our technological advancements, let's now discuss the financial results. I know many of you have joined today to learn about our results, but I want to first highlight some key achievements from this quarter. Our most significant announcement is the signing of our largest expansion deal to date. This client is one of the largest financial services firms globally, with sites all over the world, and their growth with us has been phenomenal. They began with two sites at their headquarters and a secondary lot site. Following successful pilot programs in the last quarter, they have now decided to expand to 25-plus sites globally, while also adding more capabilities based on the efficacy of those pilots. This is indeed our most substantial financial deal in terms of expansion and serves as a validation of our land-and-expand strategy. Additionally, our bookings growth this quarter was propelled by both renewals and expansion from five enterprise clients spanning various major sectors, not just limited to financial services but including healthcare and consumer segments as well. We are thrilled to witness customers not only renewing but also scaling up their partnership with us. Another highlight this quarter is our multi-year, multimillion-dollar agreement with Google. I will elaborate more on this in the following slides, but essentially, this agreement grants us access to the latest AI infrastructure products and monitoring for our CXAI platform, setting forth a combined effort with Google to transform workplace operations. This noteworthy partnership reflects dedication from both sides to enhance capabilities while simultaneously altering workforce dynamics. As I mentioned in the last call, we are developing the new CXAI platform for a brand-new client within the financial sector, and I’m happy to report that we’re launching a pilot program in Q3, which will allow a subset of their employees to test this functionality. We aim to fully deploy the new platform in Q4 at primary sites. This platform is designed to be multi-tenant, multi-OS, and multi-cloud, facilitating many interactions as outlined previously, and we proudly stand as the first in our industry to implement this structure. We’re excited about being on-track for a Q4 rollout. Lastly, during our previous call, I highlighted the CXAI VU feature, our analytics platform powered by AI. We have rolled out three pilot programs this quarter, working with clients across diverse sectors, including consumer, technology, and financial services. Our belief is that the variety of these trials will uncover valuable insights regarding use cases and capabilities that our clients seek, and we are thrilled about the outcomes these pilots may yield that we plan to present in upcoming visuals highlighting our potential services. We envision CXAI and CXAI VU as a comprehensive solution addressing the hybrid work challenges previously discussed. Now diving into the financial figures arising from these highlights, for Q2 2024, we reported $1.91 million in bookings, primarily driven by the expansion deal as well as other renewals. This is a substantial increase compared to the same quarter last year. This expansion deal is monumental for us as it underlines our land-and-expand strategy. Our annual recurring revenue (ARR) for that customer will see a significant growth of 112%, indicating immense potential moving forward. Importantly, this is just the beginning; our customer aims to expand to even more sites and capabilities. Additionally, our subscription revenue split stands at 85% recurring revenue, which is significantly improved from the previous year and signals a positive trend. Our gross margins remain consistently above 80%, showcasing excellent financial performance metrics trending in the right direction. This is the first quarter where we can adequately compare our results to this time last year, as our company had previously been part of another entity, making true comparisons more challenging. The largest takeaways from last year's financials showcase a successful transformation, pivoting us towards an AI-native SaaS model coupled with positive SaaS metrics. This quarter revealed a monumental 78% growth in renewals and expansions versus the same time last year. We successfully negotiated our largest expansion deal with an essential enterprise client in financial services, which is now increasing its global footprint after its successful pilot run. Moreover, our annual recurring revenue has surged by 120%, thanks to this expansion. Subscription revenue has increased from 79% last year to 85% this quarter, showing a six basis point rise, alongside gross margins improving by 5.5 basis points. More importantly, our net retention rate has climbed to 105%, reflecting a strong trajectory positively driven by our five renewals and the record expansion deal. Lastly, we remain focused on our bottom line, achieving more than a 15% reduction in operating expenses from the same period last year, a combination of earlier restructuring efforts and the use of AI tools to enhance our cost structure. In summary, we are significantly better off than we were a year ago, clearly trending in the right areas, and scaling efficiently. When examining financial statements, please keep in mind that we are transitioning into a recurring revenue business model that is exploding in customer penetration and engagement. It's important for our customers to effectively utilize our products. Recently, I was in New York visiting with clients, and it was amazing to witness the activity at various customer sites. I visited several locations and observed various use cases where people entered the office, utilized our application to book a meeting room, manage office space, order food, and executed their daily tasks all through one platform. This illustrates the power of our technology. Observing different office places displayed substantial engagement and application, showcasing technology's ability to foster improved outcomes. Regarding the analytics platform, people are returning to work, and for those who aren't, they want remote access from home. Our distributed architecture's role is critical. This is why users engage with both mobile and web applications at home and in the office. All these trends are steering us toward an engaged user base yearning for our tools to enhance workforce productivity. Now, we must furnish them with insights and analytics and continually improve these capabilities to further increase productivity and engagement. Now, I want to discuss our agreement with Google. After announcing a partnership with Google Cloud last quarter, this is a substantial step forward. It is now a multiyear, multimillion-dollar agreement that reinforces our commitment to leveraging cutting-edge technology for innovation and growth. The importance of this collaboration lies in our expanding customer base as we transition from being a luxury utility to a necessity in their operations. Having reliable, scalable infrastructure is paramount for delivering seamless experiences across the board. This is why having Google Cloud as a partner is instrumental for scaling customers from hundreds of thousands to millions of users. Security is another vital factor for our clients, especially large enterprises that trust us with sensitive data. Providing robust security measures and compliance with industry standards is essential. In recent times, there has been a surge of security challenges in the market, and we take pride in our collaborations with clients and Google Cloud alongside Azure and AWS, working towards establishing a fully secured enterprise environment. AI remains central to the CXAI platform. Our integration with Google's AI and machine learning tools will expedite the deployment of CXAI apps, and you will see announcements about pilot initiatives with Google Cloud in the near future. We have access to the latest technology faster than anyone else in this sector, and we intend to capitalize on that in our innovations. As I've previously stated, many clients are now utilizing our product not just as an additional resource but for critical functions, whether it's for food ordering, campus research, or efficient meeting navigation. To become indispensable, we must regularly monitor the health of the CXAI system. As a result of this partnership, Google is co-investing with us to enhance monitoring capabilities across the global customer base. Finally, let’s talk about what we’re seeing with CXAI VU. We focus on the users' experiences, enhancing every interaction with our app and integrating it with various partner functions and capabilities. This approach allows us to present a comprehensive activity timeline to employers, showcasing engagement patterns, preferences, and areas for improvement. We assess various metrics—session durations, booking efficiency, and engagement metrics—to identify user satisfaction and productivity in different environments. Customers have expressed excitement in learning how to improve employee effectiveness through data insights. I’ll share another example regarding spatial intelligence. A critical aspect of our proprietary tools is offering 3D visualization of key performance indicators (KPIs). Think about spatial activity distribution and utilization metrics, allowing enterprises to grasp the timing and usage of various spaces, enabling faster and better decision-making. Our clients, as office occupancy continues to fluctuate, are interested in ensuring a world-class experience for employees returning to the office—and they wish to provide an environment that mirrors that of home, demonstrating how new office designs reflect those of personal home offices. Many companies aim to replicate elements from home offices in the workplace, providing similar amenities to create a comfortable and productive experience for all. Thus, managing user experiences and scheduling efficiently is paramount, and our tool offers various supporting functions to facilitate these processes. We anticipate providing significant value for our customers as we finalize pilot programs, integrating successful features onto our platform.

Operator, Operator

So, with that, I'm going to take a look at some of the questions that were sent over and make sure that I address them. One of the questions asked whether the business with Google is set for substantial growth or slow growth. Collaborating with Google Cloud positions us for growth. We are determined to work closely with them and are working on additional initiatives that we will be announcing soon that will drive market objectives. Another question pertained to the S-1 that was filed on Friday, seeking clarification. I want to clarify that the shares announced for selling shareholders were a re-filing of our initial S-1, which was executed during a prior business combination due to a delay in our 10-K filing, necessitating this re-filing. Additionally, as you know, in May, we participated in a debt-equity transaction, which entailed potential share conversion. Thus, while the shares are newly mentioned, they're not necessarily new; they had been arranged prior to now, needing refiling due to the initial one becoming outdated. One more question inquired about the possibility of a partnership with Palantir in future endeavors. While I haven’t engaged with Palantir, I would be open to dialogue. They could potentially become clients, but our current emphasis remains firmly on enterprise business, not government sectors. We believe ample opportunity for scaling exists in our current approach.

Khurram Sheikh, Chairman and CEO

To conclude, why should you consider CXAI? What differentiates us in the market? Our journey has been transformational, providing arguably the most advanced solution available. We are defining the future of work through cutting-edge technology while establishing a new category in enterprise software centered around employee experience. The quest for an optimized work environment is amongst the most pressing challenges of our century, with enterprises worldwide seeking solutions for the digital workplace and workforce. We stand at the precipice of immense transformation. Our client base includes major players in diverse verticals, such as financial services, healthcare, entertainment, consumer products, and technology. We are rapidly growing through deeper account penetration. The solutions we offer are poised to become industry standards as enterprises increasingly seek to adopt similar technologies. We are present in 50-plus countries across 200-plus cities. Our growth does not solely depend on onboarding new sales representatives in those regions; we scale effectively through our technology’s capabilities in North America. We are innovation-driven with a seasoned management team and have an exceptional board based in Silicon Valley, along with remarkable partners—including Google Cloud—whose future collaborations we look forward to announcing in the forthcoming months and years. I am genuinely enthusiastic about the opportunity before us. We are on the brink of creating something remarkable, and we are guided by the principle of delivering shareholder value through diligent execution of our business strategies while enriching the experiences of our customers. Thank you for your time, and I look forward to updating you on our results in the next call as well as at the upcoming Annual Shareholder Meeting on August 29. Hopefully, everyone received the proxy information, and we’ll stay in touch as we continue to make strides in transforming the workplace.

Operator, Operator

Thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.